Unlock Efficiency in Upstream Oil and Gas Procurement with Should-Cost
Challenges Facing the Upstream Oil and Gas Sector
The industry's capital deployment approach is under scrutiny as it faces a range of challenges. Rising costs are causing a shift away from traditional lump sum approaches. Fluctuations in raw material prices make it difficult to rely on benchmarks for cost estimation. Additionally, the recent shift towards supplier risk-sharing agreements in procurement models presents a key challenge. For example, the cost of shipbuilding grade steel in 2023 increased by more than 55 percent compared to 2022. These challenges are driving the need for more innovative procurement solutions.
The rapidly evolving landscape with new challenges, such as faster time-to-market demands and supplier scarcity in certain geographies, requires the industry to find ways to streamline procurement. Single-sourcing procurement approaches are emerging as a potential solution. The "technical and commercial partnership" approach is gaining popularity as it is better equipped to handle the increasing complexities in capital equipment costing.
Evolving Procurement Approaches and New Capabilities
To leverage new procurement approaches, many upstream companies need to enhance their capabilities. This includes developing an independent perspective on the fair cost of a project to negotiate successfully with suppliers. Should-cost methodology can play a crucial role here by strengthening the shift from a lump sum approach to the technical and commercial partnership approach. It can also help identify multiple optimization levers and shorten overall timelines for final investment decisions.
For instance, a floating LNG owner carved out some hull sections and topside modules from the lump sum agreement and bid them out independently, achieving cost optimizations. In the midstream sector, companies are moving to convertible contracts with separate FEED to maintain direct-buy flexibility. In the offshore industry, some players are taking in suppliers as equity partners to reduce risk margins. And some oil and gas players are developing strategic partnerships with contractors to ensure technical standardization and unlock cross-project procurement synergies.
How Should-Cost Methodology Works
Should-cost methodology is emerging as a reliable solution to help upstream players address their current challenges. It provides granular cost transparency by breaking down the total cost of a project into components and assessing the cost drivers. Compared to traditional solutions, it can estimate costs for any combination of design, geographic footprint, and commercial agreement.
Initially developed in the automotive sector, the should-cost methodology uses a four-step approach. First, it analyzes the design choices and drawings to derive a bill of quantities. Then, it maps the value chain to identify manufacturing steps. Next, it costs the required quantities and value chains to calculate direct costs. Finally, it completes the bottom-up should-cost calculations to define components. Through this flexible and fact-based methodology, it provides end-to-end transparency on the supply chain cost structure.
For example, in a deep dive should-cost analysis for LNG tanks, full transparency on key cost drivers was provided, leading to an 8 percent cost reduction in the final negotiated price.
Should-Cost Applications in the Upstream Market
The should-cost methodology is flexible and can be deployed at multiple phases of a project, from concept design to FID and commissioning. It has benefits across multiple applications, such as enabling more effective negotiations between suppliers and operators, facilitating faster and more factual decision-making, and increasing overall profitability.
Specific instances where these benefits can be realized include first-of-a-kind projects, where it provides a solution for in-house benchmarking. It also supports fact-based discussions with stakeholders and helps assess a supplier's learning curve. It can quantify price evolutions in volatile markets and assess local constraint implications. It can also be used for trade-off analysis and contract strategy definition. And it can support claim management and price renegotiations.
Building Dedicated Capabilities for Should-Cost
While should-cost application offers significant benefits, oil and gas players need to build dedicated capabilities within the organization. There are three typical models - buy, hybrid, and make. The buy solution involves externalizing should-cost modeling for all purchase categories. The hybrid solution externalizes only high-complexity or first-acquisition categories, while keeping the rest in-house. The make solution involves internalizing should-cost modeling for all categories.
We believe the hybrid solution is the best fit for the oil and gas context, where an operator can develop internal capabilities for standard items while outsourcing higher complexity ones.
In conclusion, global volatility and changing business models have created new challenges in the upstream supply chain. By adopting should-cost methodologies, organizations can enhance operational efficiency, optimize cost structures, and drive sustainable value creation.
Unraveling the Complexities of the Healthcare Industry
Healthcare Industry Challenges and Trends
The healthcare industry has been buffeted by a growing number of challenges over the past few years. Supply cost inflation and workforce shortages have weighed on provider performance, with aggregate annual EBITDA growth from 2019 to 2024 estimated to be around 2 percent, well below the 6 percent growth in national health expenditures. Many providers have taken steps to boost their operating performance, and some have been helped by CARES Act funding and Medicaid expansion. Provider performance has already recovered in some states, and we anticipate that it could recover by the end of this year. Through 2028, mid-single-digit EBITDA growth for providers is expected, in line with overall NHE increases.Despite evidence that cost increases are abating, a focus on performance improvement remains critical. Median unrestricted days' cash on hand for large not-for-profit health systems declined in 2023 compared to 2019. Many provider organizations have relied on investment income to offset operating losses, but this may not be sustainable if returns fall. Organizations not targeting productivity improvements in core operating functions each year are likely falling behind.Leading provider organizations must pursue next-generation transformation enabled by emerging technologies like generative AI to support performance improvement across various applications. By one estimate, AI adoption within the next five years could result in net savings of 5 to 10 percent of healthcare spending. Providers need to discern their existing technology capabilities and data governance requirements to determine which use cases are best positioned to take advantage of gen AI.Digital tools should build on established solutions to enhance operations and improve patient and physician experiences. For example, new technologies like AI can predict patient volume and create more flexible schedules. It can also ease the administrative burden, with estimated annual net savings of $24 billion to $48 billion for hospitals and $10 billion to $30 billion for physician groups in the next five years.As operating performance stabilizes, providers can explore new strategies in high-growth areas. Ambulatory surgery centers and home health are two such areas with projected 7 percent annual revenue growth through 2028. Care delivery is expected to structurally change as economic pressure and patient preferences shift. These shifts could lead to a reduction of $114 billion to $148 billion in overall healthcare spending annually.Payers' Struggles and Opportunities
For payers, challenges intensified in 2023 and continued in 2024. Many payers have focused on margin recovery and overcoming challenges based on earnings calls. Some plans have been performing below breakeven profitability, and headwinds include accelerating utilization, inflationary pressure, end of pandemic health emergency measures, changes in risk adjustment regulation, and a tightening of government reimbursement.In government lines of business, MA plans face revenue and cost challenges from new guidelines and changes to the Star Rating methodology. Utilization rates remain high, and these factors could create revenue and cost pressures. In Managed Medicaid, enrollment declined after eligibility redetermination, but there are growth opportunities in states transitioning to managed care and potential Medicaid expansion.In the commercial market, payers are expected to increase premiums, but employers are unlikely to absorb all costs. Small and medium-size businesses are seeking more budget-friendly alternatives, and the self-insured sector is expected to grow. As a result, employers may reduce plan options and shift to defined-contribution plans. Payers can offer nontraditional plan types like individual coverage health reimbursement arrangements (ICHRAs), which are already experiencing double-digit growth.Pharmacy Sector Dynamics
While some pharmacy service organizations have faced obstacles, others have benefited from favorable conditions. Retail pharmacies face margin compression due to inflation, labor shortages, and rising real estate costs. Pharmacy benefit managers have faced calls for greater transparency, and the high cost of broad-population drugs like GLP-1s is creating tension.However, the biosimilars pipeline is robust, and launches have gained more market traction. Innovative models like direct-to-consumer delivery and integrated medical and pharmacy care delivery are starting to gain traction. Specialty pharmacies are on the rise, with an 8 percent CAGR in specialty drug spending expected between 2023 and 2028. Within specialty drugs, approvals of cell and gene therapies are expanding, and while the cost remains high, spending per patient could decrease as indications expand.The value chain for pharmacy services may evolve, with many organizations investing in more integrated care delivery models. A recent study found that medically complex Medicare Advantage members in a pharmacy care management program had lower cost of care per member per month.Healthcare Services and Technology Sector Growth
Unlike other healthcare sectors, healthcare services and technology has grown steadily to meet the rising demand for new data, analytics, and software. Revenue and EBITDA in the sector have experienced a CAGR of about 9 percent since 2019, and similar growth rates are expected through 2028.The HST landscape is highly fragmented, with the top ten companies accounting for approximately a quarter of the sector's revenue and the next 100 companies contributing an additional 15 to 18 percent. Limited interoperability between data sources and systems, regulatory complexity, and a diverse customer base contribute to this fragmentation.Many value creation opportunities accompany the growing demand for more advanced technologies. Technology advances may help vendors lower customer acquisition costs and build deep vertical expertise. There is also a need for technology integration to create a more seamless user experience and address cybersecurity risks.The challenges in the healthcare industry are far from over, but they also offer an opportunity to reimagine the future of care and create sustainable improvement for healthcare organizations, patients, and communities.Unlock the Secrets of Banking Transformations with Nathan Bostock
How Banking Has Transformed Over the Years
Nathan Bostock emphasizes that technology has been a game-changer. In his early days, the retail center was the branch. Now, mobile connectivity and digital backbones dominate, with data driving most interactions. Regulation has also had a profound impact, influencing consolidation and cross-border acquisitions. While it has localized banks, future growth will likely require consolidation again. Fintechs have become more abundant, forcing banks to adopt a transformation mindset to acquire new customers. There has also been a rise in alternative financing forms via capital markets and private credit.
In the future, retail banks need to focus on five principles: speed, simplicity, reliability, personalization, and value. They must respond quickly to customers, be easy to deal with, and be available when needed. Banks must compete with other industries in interacting with customers.
Approaching Transformations as C-suite Leaders
Banks with customers have a strong starting position and need to enhance their adaptability and agility. Technology architecture and operating models are crucial. There is a competition for talent, especially in technical and data-related fields. AI is becoming commonplace, and companies need to balance its use with cost reduction and regulatory compliance.
SMEs and commercial banks should shift their focus from products to helping customers grow. For example, in international trade finance, they can help companies find new markets and suppliers. After higher interest rates, banks are highly dependent on net-interest income, so a diversified business model is essential.
Lessons from Remarkable Transformations
Transformations require more than just paying attention to small details. Leaders need to be bold and take risks. They must set the right framework based on market context and involve top talent in the transformation effort. It's important to show employees the "art of what's possible" and help them develop new skills.
Hiring the right people and accessing necessary skills in a timely manner is crucial. Leaders also need to define and improve the company culture to foster collaboration and drive change. Reskilling provides new career opportunities, especially in a remote working environment.
The "Debate, Debate, Decide" Approach
Workstream leads need to be accountable and make timely decisions. The "Debate, debate, decide" approach ensures that decisions are well-informed. By having two or three main decisions each week, the pace of transformation is maintained. Canceling initiatives that don't meet the risk hurdle is also part of the process.
Quick wins, such as reducing call center calls, build momentum and prove the feasibility of the transformation journey.
The Impact of AI on Transformations
AI enhances all aspects of banking transformations. It serves as a "process enabler" in areas like contact center transcript analysis and inbound call analysis. In high-cost manual processes like finance, risk, and compliance, AI can bring significant gains.
AI helps management focus on strategic aspects like organization management and market entry. It improves analytics and predictive capabilities, leading to more efficient decision-making.
Considerations for C-suite Leaders
C-suite leaders need to have a bold ambition and bring their teams along. Training programs can help shift mindsets and visualize the possibilities. Encouragement and dedication from management are critical in helping employees believe in the transformation.
Comparing performance against budgets with AI analytics provides a more accurate view and helps manage the organization more effectively.